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Review on construction industry

Review on construction industry

Description

Construction industry in Kazakhstan is one of the strategically valuable and rapidly growing economic sectors. House construction financed mainly by the private sector is an important component of the construction. Facilities of transport and utility infrastructure are built mainly by means of public and quasi-public sectors. Substantial decrease in the market of construction works is expected in response to drop in consumer effective demand for new housing and contraction of demand for construction of roads and engineering structures by the state and national companies.

Today, the construction industry in Kazakhstan requires an intensive reforming at the macro and micro level. The main task of the state in the current difficult conditions is to ensure protection of the rights of entrepreneurs in this sector and promote positive competition, and transfer the highest possible guiding functions of the construction industry to the institution of self-regulatory organizations.

Contribution to the economy

Construction sector plays a fundamental role in the development of all sectors and therefore has a high multiplier effect: every 1 tenge invested in the construction is accompanied by growth in production and investment in other sectors of the economy in the amount of 4-5 tenge. All other things being equal, the completely developed construction industry can make an aggregate contribution of up to 40% of gross domestic product.

Scope of construction works

Mining industry

Manufacturing industry

Gross output of agricultural products (services)

Figure 1. Dynamics of the scope of construction works, in million tenge

Source: Committee on Statistics of the Ministry of National Economy of the Republic of Kazakhstan

Since 2000, the construction industry has been showing a slight but sustainable growth in the scope of work completed, in contrast to industry and agriculture, where significant declines in production were observed in 2009. The crisis of 2008 had no significant impact on the total scope of construction works.

percentage of the previous year (right axis)

in thous. sq.m

Figure 2. Dynamics of commissioning of residential buildings

Source: Committee on Statistics of the Ministry of National Economy of the Republic of Kazakhstan

From 2000 to 2014 the peak of the number of commissioned residential buildings fell to 2005, when more than 6 mln .sq. m. were built. Since 2006, about 3 million sq. m. of housing have been commissioned each year in the country. The general growth of the construction industry is based on the increase in the scope of construction of residential facilities and implementation of state infrastructure projects.

Figure 3. Index of physical volume of construction industry

Source: Committee on Statistics of the Ministry of National Economy of the Republic of Kazakhstan

Over the period of 2007-2014 no significant changes in the index of physical volume of construction industry had been observed. It is worth noting that in 2005 this figure reached its historic highs of 192.4% during the construction "boom." Moreover, the continued downward change in the volume index as a result of contraction of the construction market is anticipated starting from 2015.

Figure 4. Share of the construction industry in GDP of the country, in %

Source: Committee on Statistics of the Ministry of National Economy of the Republic of Kazakhstan

The curve reflecting the share of construction industry in GDP is similar in fluctuations to the volume index dynamics. For the period under review, the maximum value of relative share of construction in GDP was recorded in 2005 (14.1%). Since 2006, this index has been tending to decline. As of the end of 2014 the share of construction industry in GDP amounted to 6.9%.

Structure of the construction industry

Building of civil engineering facilities plays a leading role in the construction industry structure, the scope of services rendered totalled to 1,294 trillion tenge at the end of 2014. Generally, the significant share in construction refers to works on building construction (889 billion tenge) and specialized construction activities (484 billion tenge).

An important fact is that the work on building of civil engineering facilities falls into the sector sensitive to crisis developments. For example, during the 2008 financial crisis the scope of building works was significantly reduced (by 74% compared with 2007). In the current conditions of deterioration of external economic situation, the decrease in the scope of services for building of civil engineering facilities is expected.

Specialized construction activities

Construction works on building the civil engineering facilities

Works on building construction

Figure 5. Structure of executed construction works, in billion tenge

Source: Committee on Statistics of the Ministry of National Economy of the Republic of Kazakhstan

After 2009 the industry began to recover. During the period from 2010 to 2014 the scope of work completed had been increasing, except for the specialized construction activities, which had been falling off from 2012.

In 2014 compared with 2010 the largest growth in the scope of work was observed in the construction of highways (58%), works on building construction (54%), provision of electrical installation work (38%) and installation of water facilities (33%). Reduction in the scope of work over the same period was observed in the construction of utility facilities (24%).

Capacity of the internal market

Over the last 5 years the number of constructed buildings has been remaining unchanged at the level of 31-33 thous. items. At the end of 2014, 89% out of 33 211 constructed buildings come to new buildings (29,652 items), including overhauled buildings. Within the period of 2010-2014, the share of new buildings had been steadily growing among the total volume of constructed buildings, but recent structural changes associated with the contraction of the economy led to a fall in effective demand from the population for new buildings.

House construction is one of the main directions of construction industry development. Cost and scope of construction of residential facilities over the last 5 years has been steadily increasing, indicating a high demand for these works. The main reasons for increase in house construction are the increase in population, increase in household income, improvement of the types of financial support for housing (mortgage lending, state backing) and dynamic urban development throughout the country. The share of new buildings of the total commissioned buildings within the period under review averaged about to 73-74%, and in 2014 this figure reached 79%.

Actual construction costs also tend to increase. Thus, when in 2010, 449 billion tenge were spent to house construction, then in 2014 the costs amounted to 642 billion tenge. The positive changes in house construction are also evidenced by the information on commissioning of residential buildings by private developers. In 2014, the number of commissioned residential buildings amounted to 3,785 thous. sq. m., which is slightly less than the maximum index for the period from 1991 to 2014, achieved in 2007 (3,856 thous. sq. m.)

Source: Committee on Statistics of the Ministry of National Economy of the Republic of Kazakhstan

In the house construction the main part of funds is spent to multi-family housing. So, in 2014 the share of funds for the construction of multi-family housing totalled to 64% of the total cost or 393 billion tenge. 223 billion tenge (36% of total costs) is spent for the construction of individual buildings. The growth of total costs for housing within the period of 2010-2014 amounted to 40.7%. Over the same period, the growth of costs for multi-family housing made up 44.5%, and for the construction of individual buildings - 34.5%. When in 2010 about 310 million tenge in average was spent to the construction of new building, this figure had risen to 696 million tenge by 2014. The inverse correlation between the actual cost of multi-family housing and the total amount of commissioned new buildings may be noted. The growth in actual cost of construction is an internal factor limiting the opportunities for growth in the volume of construction of new buildings.

At the same time, the increase in the cost of construction has almost no influence on the volumes of construction of individual buildings. In 2010, the expenses on the construction of one individual building amounted to 7.37 million tenge at the average, and in 2014 expenses reached 8.66 million tenge. During 2010-2014, the uniform growth in the actual cost of construction of individual building was accompanied by a significant increase in the number of facilities from 166 to 243 items. Thus, the construction of apartment complexes depends on the cost of the construction of one building, while the construction of individual buildings is not affected by the price factor.

Source: Committee on Statistics of the Ministry of National Economy of the Republic of Kazakhstan

For the period under review, the number of commissioned non-residential facilities had decreased by 30% and in 2014 amounted to 4,950 buildings. However, the cost of construction of non-residential buildings increased by 21% and amounted to 1,723 billion tenge in 2014, indicating a rise in cost of construction of one item of non-residential facilities. The main and fundamental non-residential facilities are represented by main pipelines, office buildings, industrial facilities, facilities for industry, educational institutions and others.

Characteristics of the domestic housing market can also be provided by information on housing prices. In March 2015 the national average price of 1 sq m. of new housing was 225.4 thous. tenge (increase by December 2014 - 1.8%), and the secondary housing - 175.1 thous. tenge (increase by December 2014 - 0.1%). The greatest escalation in prices of new housing compared with the 1st quarter of 2014 is observed in Kokshetau (+ 16.8%), Semey (+ 12.1%), Karaganda (+ 11.6%) and Kyzylorda (+ 9.3%). The highest price of 1 sq. m of housing in the secondary real estate market was noted in Astana (326.5 thous. tenge), Almaty (287.4 thous. tenge), Aktau (283.7 thous. tenge). A significant increase in the above prices as compared to the 1st quarter of 2014 was registered in the cities of Taraz (+ 21.9%), Aktobe (+ 20.1%), Kokshetau (+ 18.9%) and Petropavlovsk (+ 10.7%).

The main players in the construction sector

The majority of large construction companies of Kazakhstan are located in the cities where large-scale construction works are performed. These are primarily fast-growing urban agglomerations of Astana and Almaty. There are plenty of companies at the construction market of Kazakhstan nowadays. Among them there can be separated 12 largest construction companies employing more than 1000 employees each. They are represented in Table 1 below.

Table 1. List of large companies engaged in residential and non-residential construction in Kazakhstan

Company name

Type of company activity

Location

Rudnyisokolovstroy JSC»

Non-residential construction

Rudnyi, Kostanay region

Basis LLP, Astana Branch

Residential construction

Yesil district, Astana

Neftestroyservis Ltd.

Residential construction

Uralsk, West-Kazakhstan region

Oil construction company LLP

Residential construction

Aktau, Mangistau region

Eristrail-Kazakhstan LLP

Residential construction

Abay district, South-Kazakhstan region

Tsentrkazenergomontazh JSC

Residential construction

“Almaty” residential district, Astana

Kuat Grandstroy Almaty LLP

Residential construction

Medeusky district, Almaty

Branch of Kazakhmys-

Kaztsentrstroy Corporation LLP

Non-residential construction

Zhezkazgan, Karaganda region

Elektromontazh JSC

Non-residential construction

Bostandyksky district, Almaty

Mekhstroyservis JSC

Residential construction

Auezovsky district, Almaty

Basis Construction Company

Residential construction

Bostandyksky district, Almaty

LLP Munaikurylysservis LLP

Non-residential construction

Kyzyl-Sai, South-Kazakhstan region

Source: Association of Legal Entities (ALE) «National Association of Construction Sector in the Republic of Kazakhstan»

Barriers and limitations

Main barriers faced by business entities in the construction sector are the following – limited access to the market, non-availability of qualified personnel and insufficient funding, legal regulation in the sphere of compliance with the environmental safety requirements.

Barriers related to market access

The requirement of mandatory licensing of the activities in the sphere of architecture, urban development and construction acts as one of the most serious barriers faced by business entities in the construction sector. Some terms and conditions of obtaining a license like having a 5-year market experience for the company applying for a category 2 license and 10 years – for issuing a category 1 license to the company represent a serious barrier in the way of new companies entering the market.

Besides, the licensing procedure gets even more complicated due to the ineffective system of issuing licenses in the construction sector. Based on the information provided by “Atameken” (National Chamber of Entrepreneurs of the Republic of Kazakhstan), the process of construction of an average statistical construction object requires obtaining of about 50 approval documents (permits, notifications, coordination approvals, resolutions etc.), performance of more than 260 signatures that takes all in all about 500 working days. All that, in its turn, results in the terms of construction and costs of erection of the construction objects.

Disintegration of the national economic area is one of the innate barriers for development of the construction sector in Kazakhstan. This phenomenon can be explained by a large area of the country along with a small number of population (the population density of 6.4 people per 1 sq. m makes the country the 184th among 195 countries of the world). The situation is getting worse due to large distances between most settlements and high concentration of the population in southern regions and big cities.

Insufficient or underdeveloped infrastructural support of the construction sector is another barrier present at the national market. Irrationally conducted transportation flows along with low quality of highway and railway transport infrastructure, poor engineering, technological and infrastructural support while providing land plots for the purpose of complex construction exerts a negative influence on economic effectiveness of the construction sector. Due to the fact that the construction sector is insufficiently provided with basic engineering and technological means it is observed an increase in the costs of construction companies related to manufacturing and transportation of the construction products, that, in its turn, increases the costs for the end users of services rendered by the construction sector.

The problem of accessibility of land plots is another important issue to be considered at the national construction market. Presently, the house construction is limited due to availability of barriers in the system of management of land resources, in particular, in terms of getting access to the land plots to be used as the construction sites.

Non-availability of human resources

Non-availability of human resources related to lack of qualified personnel is one of the most significant barriers and key problems of development of national the construction sector. At that, it should be pointed out both lack of sufficient quantity of qualified personnel and poor quality of training of the already working personnel.

Limited funding of the projects

Financial support of the construction projects is very often a basic problem faced by business entities because as it has been already mentioned, the costs of erection of the construction objects are permanently increasing and the expenditures of the entrepreneurs on obtaining the relevant construction permits are also increasing. Besides, the payment ability of populations and business entities remains low at the background of a high demand for residential multi-dwelling units, industrial and commercial premises.

Imperfection of the procedures of government and quasi-government public procurements

Considering the fact that most part of construction of engineering facilities and motor ways is financed from the funds of the state budget, public procurements represent the basic source of funding for a certain part of entrepreneurs. Imperfection of the legislation governing the sphere of public procurements results in practice in different interpreting of the same regulatory provisions by ordering customers (in the government and quasi-government sectors). In particular, there occur misinterpretations while calculation of the costs of the entrepreneur’s works by the tender board or committee. For example, while performing public procurements for the subcontractor works related to construction of a building or a premise one ordering customer evaluates all the construction works previously accomplished by a potential purveyor of works (installation of construction fencing, laying of infrastructure pipelines and utilities, determining of geodetic markers etc.), while the other – solely those acts of commissioning of a similar constructed building/premise having only similar technical specifications, capacities and other parameters, which correspond to the item of public procurements. At that, national laws provide no definition for the terms of ‘a similar procurement item’ or ‘similar works’.

Backwardness of the applied technologies

Technological backwardness of the construction sector enterprises reveals itself in using power-inefficient technologies and the outdated high energy-consuming equipment. The innovation activities of construction companies are also insufficient.

Increased environmental protection requirements

Nowadays, due to increased international requirements and general aggravation of the environmental conditions there are imposed stricter regulatory requirements in terms of compliance with environmental protection standards along with enhancement of liability of business entities for failing to comply therewith.

SWOT-analysis

Based on the results of studying the construction sector it is performed a SWOT-analysis of the construction sector providing a detail investigation of strengths and weaknesses, threats and opportunities to provide for further development of the sector of construction services

Table 2. SWOT-analysis of the construction sector

Strengths

Weaknesses

• Availability of government programs creating a demand for the services of construction sector enterprises, like Nurly zhol government program for infrastructural development, government program for accelerated industrial and innovation development of the Republic of Kazakhstan for the years 2015 to 2019, etc.;

• Implementation of government programs suggesting infrastructural development creates a stable demand for construction materials;

• Availability of a sufficient base of raw materials to form up subsectors specialized in manufacturing of a wide assortment of construction materials;

• Expanding growth of urban agglomerations of Astana, Almaty, Shymkent, movement of the population to the cities creates a demand for the services of house construction sector enterprises.

• Substantial wear and technological backwardness of means of production at the construction sector enterprises;

• Import dependence of the construction sector in terms of equipment and most finishing materials;

• Lack of qualified personnel in the construction sector;

• Decreasing of repayable demand for the residential construction objects and industrial and commercial premises due to stricter borrowing requirements practiced by the banks of Tier 2;

• Poor engineering, technological and infrastructural support while providing land plots for the purpose of complex construction;

• Corruption practices at the authorities issuing licenses and permits for construction;

• Incompliance of the system of technical norms and standards in the construction sector with international construction standards.

Opportunities

Threats

• Necessity of repair and overhaul along with construction of new highways within the framework of the transport infrastructure development program;

• Manufacturing of the new-generation of high-quality construction materials and products would allow decreasing the level of import dependence;

• Creation of the institute of self-governing organizations would allow decreasing the regulatory load on entrepreneurs and business entities from the part of government authorities increase the regulatory efficiency, develop cooperation between the business entities in the construction sector.

• Implementation of dual education would allow practical cooperation between the construction companies and professional training educational establishments enabling the latter to train the workers possessing necessary knowledge, skills and abilities.

• A threat of outflow of qualified personnel from the construction sector;
• Devaluation of national currency in February 2014 and August 2015 caused decreasing of business operations in the construction sector as the result of permanent losses borne by subcontractors due to increased costs of imported construction materials and equipment;

• Economic recession provokes the risk of decreased demand for the house construction;

• Price falls at the market of raw materials result in revision of budget expenditures including those allocated for construction of infrastructural objects.

Contribution of the construction sector into the national economy of Kazakhstan is estimated at the level of 6.9% GDP (by the end of the Year 2014). The works related to erection of residential blocks and residential construction objects and special-purpose construction works are the leaders in the construction sector.

The number of construction objects built in the country remains constant at the level of 31…33 thousand items annually during the last 5 years. The house construction is one of the main trends of development in the construction sector. The volumes of construction of high-rise multi-dwelling units depends on the costs of their construction while increased constructions costs exert no influence upon the quantity of the built individual residential homes. Most major construction companies of Kazakhstan are operating in the cities of Astana and Almaty.

Main barriers faced by business entities in the construction sector are represented by administrative barriers limiting access to the market, non-availability of qualified personnel and insufficient funding. Technological backwardness of construction sector enterprises using power-consuming technologies and outdated equipment is also observed.

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